Obama said lawmakers should act on a short-term package of
spending cuts and changes to the tax code that would increase
revenue, such as limiting tax breaks, to replace part of the
$1.2 trillion in across-the-board reductions.

“Deep, indiscriminate cuts to things like education and
training, energy and national security will cost us jobs and
slow down our recovery,” Obama said at the White House. “This
doesn’t have to happen.”

The March 1 deadline marks another fiscal showdown between
the administration and Republicans, who have a majority in the
House of Representatives. Republican leaders have said they
expect the spending cuts to take effect, partly because they
won’t agree to new revenue measures that Obama and some other
Democrats have said they want.

“We believe there is a better way to reduce the deficit,
but Americans do not support sacrificing real spending cuts for
more tax hikes,” House Speaker John Boehner, a Republican from
Ohio, said today in a statement.

Tax Changes

Obama didn’t specify what tax changes he would seek. He has
said previously that he wants to trim tax breaks for top earners
and change the treatment of profits in buyout deals, known as
carried interest.

Those profits are often treated as capital gains, which
receive preferential rates under the tax code compared with
levies on wages; Obama has advocated counting the earnings as
ordinary income for tax purposes. That would raise about $16.8
billion, according to the congressional Joint Committee on
Taxation.

The president framed the debate in economic terms.

“Our economy right now is headed in the right direction
and will stay that way as long as there aren’t any more self-inflicted wounds coming out of Washington,” Obama said.

While there are signs of strength in the housing market and
gains in hiring, forecasters predict a slower U.S. economic
expansion as tax increases and spending cuts crimp growth and
demand for exports drops with a weakening global economy.

Economic Growth

After the U.S. economy advanced at a 3.1 percent annual
rate in the third quarter, the government reported last week
that it stalled in the final three months of the year,
registering a 0.1 percent decline in part because of lower
defense spending. The median estimate of economists surveyed by
Bloomberg is for growth of just 2 percent this year.

Congress created the automatic cuts in August 2011 as part
of an agreement to raise the U.S. debt ceiling. They were set to
begin in January, though lawmakers delayed them for two months
in a Jan. 1 measure that let tax rates rise on top incomes.

Democrats are debating alternatives for replacing the
spending cuts during a closed-door retreat today in Annapolis,
Maryland. Senate leaders including Patty Murray of Washington,
chairwoman of the Budget Committee, and Appropriations Committee
Chairwoman Barbara Mikulski of Maryland will address lawmakers
on fiscal issues.

There is no agreement on what options Democrats will choose
or how big the plan should be, said two Democratic aides, who
sought anonymity to discuss the private talks.

Revenue Alternatives

One alternative would be a $50 billion package of spending
reductions and higher revenue to cover a five-month delay of the
automatic cuts, one of the aides said. Obama isn’t expected to
outline specific cuts, according to one of the aides.

Senate Majority Leader Harry Reid said Jan. 29 that
Democrats would discuss the cuts at the retreat.

“There are many low-hanging pieces of fruit out there that
Republicans have said they agreed on previously,” Reid, a
Nevada Democrat, told reporters, citing one that addresses oil
companies. “We’re going to make an effort to make sure” that
action on the spending cuts “involves revenue,” he said.

Higher taxes on oil companies that Democrats have
considered repeatedly would raise more than $20 billion. Senator
Carl Levin, a Michigan Democrat, has suggested corporate tax
changes that would limit companies’ ability to shift profits
outside the U.S.

Republican Stance

“The challenge we face right now is the fact that
government spending is completely out of control,” Senator
Mitch McConnell of Kentucky, the Republican leader, said
yesterday on the Senate floor. “So to focus on a tax of any
kind is to miss the point entirely.”

In an interview on Bloomberg Television today, House
Majority Leader Eric Cantor said Democrats and the president
have been “absent” in working toward fiscal discipline. “All
we hear from this president is ‘we’ve got to raise people’s
taxes.’ That’s just not the answer,” said the Virginia
Republican.

Boehner and House Budget Committee Chairman Paul Ryan, a
Wisconsin Republican, have said they expect the full spending
cuts to take effect.

Last year, the House passed a bill to replace the
reductions with curbs on entitlements and other programs,
including federal food stamps. It also would have ended the
child tax credit for non-U.S. citizens.

Funding Clash

The parties also may clash over how to fund the government
for the rest of the fiscal year. House Republican leaders are
considering a stopgap measure at a lower cost than the current
$1.043 trillion budget, said Representative James Lankford, an
Oklahoma Republican.

The measure, known as a continuing resolution, would fund
the government through Sept. 30 at about $974 billion, Lankford
said in an interview yesterday. “It’s a serious cut,” he said.

Republicans also are criticizing Obama for missing the
legal deadline for submitting his budget plan to Congress, which
is the first week in February. Obama will send his fiscal 2014
spending proposal in mid-March, according to a budget official.